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Smith v Smith [2007] EWCA Civ 454

Appeal against an order in ancillary relief proceedings principally on the grounds that the order would force him into insolvency. Appeal allowed to a limited extent.

The district judge had started from a 50/50 divison of the assets but the husband argued that he had been given illiquid assets (ownership of his company) and she had been awarded liquid assets in the form of a Spanish property and ownership of the industrial units used by the husband's company. There were also periodical payments from the company income that the husband claimed amounted to double counting. The Court of Appeal adjusted various aspects of the original order to reflect these arguments.


Neutral Citation Number: [2007] EWCA Civ 454

Case No: B4/2007/0372
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 15/05/2007

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Between :

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MR A SMITH (Litigant in Person) the Appellant
Mr E BOYDELL (instructed by Messrs Wilsons) for the Respondent

Hearing dates: 19th April & 25th April
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Mr Justice Coleridge:

1. On 17/4/07 Wall LJ heard an application by the appellant Husband (H) for permission to appeal against the order of HHJ Davies dated 17 Jan 2007. Wall LJ's order provided for the substantive appeal to follow if leave was granted. In the event as matters have transpired this court dealt with the application for leave separately by granting leave on Thursday 19 April. For that purpose we heard argument at some length from both H (who is in person) and the wife's counsel, though not her counsel at the previous hearings. On 25 April we heard further argument in respect of the substantive appeal (including from the wife's original counsel) and this judgment is in respect of the appeal itself although I have well in mind the arguments fully advanced by counsel in respect of the leave application.

2. HHJ Davies' order had dismissed H's appeal from the order of District Judge Murphy dated 13 Oct 2006. The District Judge's order was made following a three day hearing on 13/14 September and 3rd October 2006 in Salisbury County Court. There was a further hearing before the District Judge on 21 December 2006 relating to an application by the respondent wife (W) to enforce part of the order for transfer of certain shares. H appealed that order too and that appeal was also dismissed by Judge Davies by her January order.

3. The District Judge's main order, the one which is at the core of this appeal, was in respect of cross applications for ancillary relief following the dissolution of the parties' ten year marriage which ended in August 05. A Decree Nisi was pronounced on 28/6/06 and the W's main application was issued on 20 September 2005.

4. The terms of the District Judge's order were based on his underlying intention, explained in his reserved judgment, to try to achieve a 50/50 split of the net assets having repaid certain very large secured debts which the parties had accumulated and which were owed to third parties, both individuals and banks.

5. The order reflects the quite complex nature of the parties' finances. In summary the effect of the essential terms and judgment is as follows :

1. An equal division of the net proceeds of the former matrimonial home, Wrights Manor, Salisbury, (in fact that is a negative sum because of the debts secured against it)
2. A Transfer of 2 business units at Fordingbridge Business Park to the H ; again after accounting for secured borrowing an asset of no real value
3. A Transfer of the parties' jointly owned Spanish property to W, an asset valued by the District Judge at £400,000
4. A Transfer to the wife of the shares in a company called Kerala Ltd which owned the business premises from which the H's company, South Coast Bearings Ltd. (SCB), had traded for 11 years. The premises were said to have a value of £175,167 net of potential CGT on sale
5. A pension sharing order in favour of wife which gave her benefit of pensions worth about £25000

And finally in relation to income provision

6. Periodical payments to W during joint lives at the rate of £2800 per month reducing to £2300 pm after sale of the former matrimonial home.
7. Remission of arrears of Periodical Payments save for £24,150 due under interim orders
8. School fees for the child of the family for the rest of the academic year 2006-07 but not beyond and then a nominal order at 5p pa
9. No order as to costs

6. All these orders were made on the basis that H kept the business contained within the company (SCB). During the hearing H had finally accepted that the Company was his. It had been the mainstay of the parties' lifestyle during the marriage. The District Judge took the value of the company at £425,000 based on the report of a joint valuer and other concessions made in cross examination. The valuation was based on a price earnings formula.

7. So H kept the company, W took the Spanish property and the premises from which the company traded. The Court then ordered significant periodical payments on top based on District Judge's finding as to the true income potential of H from the company.

8. Certain preliminary points call for mention before turning to the main appeal.

a. Throughout the hearing in front of the District Judge, H was represented by specialist counsel. Since then he has been in person. Unsurprisingly therefore the notices of appeal are somewhat discursive. This is not intended to be critical merely to draw attention to the fact that the court has had to be careful to ensure the H's case is fully explored and considered.

b. This is a second appeal and so the court has had to be particularly careful to ensure it takes full account of S55 of the Administration of Justice Act which only permits a second appeal if it involves an important point of principle or there is some other compelling reason for the appeal to be heard.

9. It is impossible properly to consider H's appeal of the Circuit Judge's order without referring fully to the Husband's appeal against the District Judges' order of 13 October 2006.

10. W's counsel helpfully summarised the thrust of H's criticisms of the District Judge's order in his note prepared for hearing in front of Judge Davies:

"The essence of his grounds seems to be:

a. the Wife was given the liquid assets and he was given the illiquid assets;
b. the District Judge wrongly assessed the value of his company SCB;
c. the District Judge wrongly assessed the debts of his company SCB;
d. the District Judge failed to take CGT into account;
e. the District Judge was wrong to transfer the shares in Kerala Limited to the Wife and thus transfer to her ownership of Unit 1 in which his company is based;
f. the District Judge wrongly assessed the income of SCB;
g. the District Judge doubled counted as to income and failed to assess the Husband's means properly;
h. the District Judge failed to secure the future of his business SCB by the orders made."

11. In appealing Judge Davies's order in essence H reiterates the previous grounds and emphasises his inability to pay. He said this:

"I am appealing the whole order as its implementation will be devastating to me and South Coast Bearings (and its employees). The company will be forced into liquidation and I will be forced into bankruptcy.

Judge Davies has failed to properly conduct a balancing exercise and ignored the most relevant points. The company is illiquid and on the verge of being liquidated by the Inland Revenue. I have been told to try harder in my efforts to negotiate a settlement with them. I am no longer taking a salary from the company as I strive to do so. The fact that I have no tangible assets to raise capital to do so has been ignored. Consequently, so have my ongoing escalating debts."

Overall the husband mounted a general attack on the overall fairness and quantum of the District Judge's order. The Circuit Judge dealt with it in this way in her judgment…

"What he says in para. 10 of that recent affidavit is:

In summary, I started the marriage ten years ago with the company with Unit 1 and a four-bedroomed property.'

That is what he said to me in that if the order of the District Judge is upheld he will, he says leave this relationship with neither a viable company nor a property. He goes on to say:

`My wife-to-be was a declared bankrupt. If nothing is reversed in this appeal, I will end up with no company, no unit, no residential property and no source of income with debts of about £235,000. I will clearly be forced in to personal bankruptcy. I appeal to the court that this cannot be fair and that her order in no way reflects 50% on the actual matrimonial assets. I also ask the court for an immediate full and final settlement as the conclusion to these events. My wife's superior legal knowledge with her solicitor's help by using the legal system, for example, Section 37, has resulted in bringing me to my knees by not allowing me to sell assets at real market value which would have been higher than they are now'"

12. H also expands his points in a recent affidavit although that is in reality more of a skeleton argument in support of his earlier points. Finally H also seeks to introduce new evidence of the level of debts which he has to the Inland Revenue and which he says were not properly known about or considered by either the District Judge or Judge Davies. They are now put at some £91,250 as a result of the H having rearranged the accounts of the company and the parties' assets to accommodate the parties borrowing during the marriage.

13. Let me say something about the background. I collect this from the early part of the District Judge's judgment (and there was also a chronology filed by Wife's counsel) as repeated by the circuit judge.

"Suffice it to limit my recording of the background to the salient features, which are these. The wife is forty-nine years of age and a dance teacher by way of main occupation, (although she is not currently engaged in pursuing that occupation or career). The husband is forty-three years of age and is a Company Director but also by quite recent qualification, a golf professional; that is a member of the PGA. There is one child in the family called Chanel, who is fourteen, but she is not a natural child of both parties but of the wife alone. The wife also has an adult son called Lee. Chanel is presently being privately educated at Frensham Heights School in Surrey. The wife lives at a former matrimonial home, Wrights Manor, St Mary's Road, Dinton, Salisbury whilst the husband until recently lived in rented accommodation in Totton, Southampton but now lives at Unit 1, Greatbridge Park, Romsey or did at the date when he gave evidence in this case. Unit 1 is a commercial premises from which the business of South Coast Bearings Limited (which I shall call the company) is in the main, run.

The company is the main company of which the husband is the director and from the company, and for sometime until September 2005, both parties derived an income from it. Further, the company was for sometime, until September 2005, substantially directed by the wife as a quasi-financial director in the absence of the husband. Further, I record by way of background, that any capital assets of the parties comprise mainly real property and business assets rather than liquid assets. As for income sources, although some modest income and benefits may have been derived from the wife's occupation, as a dance teacher, the primary source was the company by way of the fixed monthly salary of the husband and borrowings through the vehicle of a director's loan account, accessed by both husband and wife through company credit cards."

14. The District Judge delivered a long and careful reserved judgment at the end of this far from straightforward case. As I say it proceeded from the assumption that the pot should be equally divided. He then set out to try and achieve that in a pragmatic way by dividing up the assets. He was also very critical of both parties' profligate spending and of H's manoeuvring which resulted in heavy legal costs.

15. The District Judge also tackled some of the subsidiary issues by reference to a schedule of issues. I take these from para. 21 of his judgment and mention a few of them.

16. So far as the parties contributions and needs are concerned he said;

"In my view, the contributions of each party have been equal, entitling each, without more to leave the marriage with an equal share. The husband brought with him in to the marriage, the company, but the wife has worked in that company in place of him and without a commonplace remuneration. Any prodigality consequences, without more, ought to be shared. Is there more? Yes, there is. First, the need for the wife and Chanel to be reasonably housed if at all possible. Secondly, it is not really to be contemplated that the company to be sold under the aegis of any court order. Whatever the borrowing burdens and whatever might come about as a consequence of the companies trade and whatever choice the husband might make in due course, the income vehicle that the company provides is for preservation not destruction. The introduction of Unit 3 at Greatbridge Business Park to the balance sheet seems to me to be a necessary course to be contemplated."

17. As for the shares in Kerala he said;

"Should the shares in Kerala, which owns the unit, be transferred to the wife?" And
"Could this property be transferred from the husband's name to the wife's? It seems to me that these matters could be, considering the context and if it is thought reasonable to include there be in an order and how provisions of such, be implemented."

18. Dealing with income, he said;

"What has the parties past income been?
Save for the salary from the company to the husband, variable amounts obtained from borrowings and expenses drawn down from the company; that is as before, but perhaps with more restraint and by way of dividends, so as to give him the benefit of the profitability of the company.

What is each party likely to earn in the future?
I have answered this in part already, but further subject of the fortunes of the company which as are reported by Miss Linnell are subject to optimism by Mr Bush which, on the turnover front, is repeated in his written statement, the income of the husband will continue as before with the salary of £2,600 per month, on any substantiated figure being supplemented by credit card expenditure perhaps now to a lesser extent; additionally, if the husband sensibly chooses to do so and arrange so, distribution of profit by dividend. The wife ought, whether through business or employment, be able within a reasonable time, to obtain income to support herself and Chanel, at least in part. In her Form E, she indicates a business as a dance teacher, she has a law degree. She can reasonably be expected after a period of adjustment, during which avenues of employment can be followed up to find such so as to produce, it seems to me, no less than £20,000 per annum. I appreciate that this view is expressed with little evidence put forward, as to the parameters of likely salary or pay but for her to have less in the circumstances of her demonstrated ability when involved with the company, the dance teacher qualification, the law degree, would be strange indeed. I do not suggest that in her relevant ambitions she should be limited to that sum."

19. The District Judge's essential reasoning in support of his order was as follows …

"In rough terms therefore, or on the basis:

i. The company's problem re: the director's loan has to be dealt with.
ii. The liabilities of both parties individually and jointly have to be met.

If the court deems by reference to contributions and the yardstick of equality that assets should be equally divided, then the exercise can reasonably, I do not say fairly at this stage, be started by setting the Villa Rosa proceeds on one side for the wife and the company values on the other side for the husband. An imbalance obviously occurs. However, clearly the transfer of Villa Rosa completely to the wife is made out as fair in the first instance. Should there be any further adjustment after that, in favour of the wife at all? In my view, having regard to the state of the company director's loan account, without impinging on the expressed intention of the husband bringing No. 3 Greatbridge Business Park into the company's balance sheet. That is absolutely necessary. There should be no impinging on that expressed intention, as long as it happens. If Unit 3, Greatbridge Business Park is taken out of account, at point of further adjustment and is to go on the company's books, that must mean that Unit 1, Greatbridge Business Park is the only vehicle to make further adjustment. This being held by Kerala Ltd., if appropriate to transfer to the wife, and I think it is, would require transfer from a shareholder taking the wife to a capital position of a little over 50%. Which in the circumstances of the needs for housing and paying debts, including costs, will leave a sum to buy a modest property in the current area.

That dealt with the capital side of the case

20. So far as his decision in relation to income provision is concerned he said this …

"In my judgment, taking into account all those four aspects, albeit with the benefit of hindsight, the proper Interim Order on the facts as known, would have been a figure of £2,800 per month i.e. one half of £2,600 plus one half of the notional dividends or other drawings, based upon the profit of the business. In very rough and ready terms, not suggesting that this figure can be extracted from any one year of accounts, I have concluded that there was availability of profit on a gross basis of some sixty thousand pounds at least, taking a notional tax percentage at the higher rate of 40%, then it seems to me that is £3000 and one half of that would be available to add to one half of the £2600 bringing it to about £2800. If that is the case, and I shall come to the problem about arrears in a moment, I take the view that the Periodical Payments Order which necessarily must follow. In the absence of meaningful or any income returning to the wife at the present time, and on the basis that she needs some period of time to explore the avenues of employment to which I referred, there will be an Order for Periodical Payments which will be at the rate of £2800 per month until the sale of Wrights Manor; and thereafter, at the rate of £2300."

21. Then arrears he reconsidered on the basis of the new calculations and concluded that £24,150 was a fair amount which he suspended for 6 months. As for school fees he said ….

"As far as the child Chanel is concerned, it is sought that there should be nominal periodical payment so long as the School Fees Order, which Mr Boydell sought to be part of the Order, is complied with. As well as that he puts forwards his client's undertaking not to apply for an upward variation of a nominal periodical payments order whilst the School Fees Order, is being paid. What is sought is, until the age of 17 years or ceasing full-time education, whichever be the later. For the reasons that I have indicated, balancing the need not to be precipitate with the perception that really these are not affordable, I propose to make an Order with regard to the payment of school fees, as is sought but only until the end of the academic year 2006/2007 rather than until the age of 17 years or ceasing full-time education."

22. So that is the manner in which the District Judge tackled the case and I have set out the main criticisms made by H as summarised by the W's counsel and as presented to the learned Circuit Judge.

23. So far as Judge Davies's approach on the appeal to her is concerned, she dealt with the law as follows ….

"So far as the law is concerned, hearing an appeal from a District Judge I can only consider allowing that appeal if the District Judge was plainly wrong or there has been an error of law. Both parties rightly accept that there was no error of law, so the question I have to answer is whether the decision reached by the District Judge was plainly wrong."

She also reminded herself of the overall complaint by H as I have already dealt with. Then between paras. 11 to 19 of her judgment she draws
attention to a number of factual matters which have happened since the first hearing. However nowhere does she really address the main points in the husband's notices of appeal.

24. Then at paras. 19, 20 and 21 she concludes her broad survey. In this way…

"Considering those matters, I ask myself where is the evidence that the District Judge was plainly wrong in coming to the conclusion that he did? On the assets as they are shown in that schedule, particularly having brought them up to date, what the wife is left with is entirely in accordance with recent authorities to which Mr Boydell referred.

I am further persuaded that there is no basis for concluding that the District Judge was wrong in terms of his distribution of the capital assets because in giving the additional evidence that the husband did to me today, he was not frank and forthright and honest in so doing. There is the example of the legal fees to which I have referred; there is this failure to try to improve his situation in any way; there is the fact that he has clearly no intention and has had no intention of making the periodical payments. So far as that is concerned, I did give some consideration as to whether it would be appropriate in the light of what he has said about his means to reduce the amount that was to be paid to the wife. But I have come to the conclusion that that would not be appropriate because on the figures relating to the company both the income he draws from it and the profits of the company albeit there is the debt, which is clearly of considerable significance, I am not satisfied that this husband could not pay these sums if he chose to do so, and the analysis which the District Judge applied in calculating the amount due seems to me to be entirely appropriate."

25. H's main criticism of the Circuit Judge's decision is that she did not really grapple with his criticisms of the District Judge's judgment and order, as I have set out above.

26. The wife supports both the orders made before the judges below. The point is made by her counsel, and it is correct, that both the District Judge and Circuit Judge are extremely experienced. It is further asserted that the solution which was arrived at was really the only practical one which protected the wife.

27. Counsel further cautions against trying to achieve a clean break and reminds the Court of the difficulties the wife has faced in these proceedings by reference to a lengthy schedule of default and her pressing need for funds now. They are powerful points. Counsel is concerned also about the possibility of the husband's bankruptcy which might undermine any capital order which post-dates the District Judge's order.

28. This is a peculiarly tricky case given the limited resources and the history and I am very slow to interfere with the discretion exercised by both the Circuit Judge and the District Judge. However, I have come to the conclusion, examining both judgments and taking them together, that H is entitled to criticise the Circuit Judge's broad approach. He had identified a number of very specific areas which called for scrutiny by the Circuit Judge and she did not tackle them. I think in the circumstances, that these shortcomings in the judgment in themselves amount to a compelling reason why the appeal from the Circuit Judge's order should be allowed and her order dismissing the appeal set aside.

29. There are two courses now open to this court. It could either deal with the substantive appeal from the District Judge now or remit it for the appeal to be heard again. In discussion with the parties last week they invited us to deal with the matter substantively here and now if we concluded that the appeal should be reheard. Accordingly that is what I propose to do.

30. Having read the District Judge's conclusions and his careful judgment I remain concerned about his essential reasoning and conclusions and orders in the following respects.

1. The District Judge's approach that the starting point should be 50 % in circumstances where the assets all came from H (company and house) and the marriage only lasted some 10 yrs. In particular the company was established before marriage. So, I think that, in this case, that was the wrong starting point despite his findings as to contribution.
2. The unconditional transfer to W of the premises from which company trades (by way of the transfer of the Kerala shares) leaving the trading part of the business with the husband is also, in my judgment and experience almost unheard of and likely to be erroneous save in the most exceptional situation.. To leave the parties in a position of financial entanglement by way of a relationship of landlord and tenant is a recipe for ongoing dispute.
3. Having included the Company at full value and allocated it to the husband, to award the W the equivalent of half the husband's income generated from the company by way of periodical payments for joint lives was also wrong. It amounted to double counting where, in particular, the business premises were expected to generate a further income for the wife in addition.
4. No proper account was taken of the difference between the paper value of the company based on valuation evidence and the value of real property which is to be sold; the so called copper bottom assets and risk laden assets argument.
5. I am also concerned that full account was not taken of the debts transferred to H and the indemnities which he gave. Similarly no account was taken of CGT payable on sale of company, or the inland revenue corporation tax debt and costs of sale.

31. Considering these factors, in my judgment, the District Judge fell into error when awarding the capital provision which he did together with a life time periodical payments order. That was an excessive proportion of the overall resources and, I am driven to say, plainly wrong.

32. This case cries out for a clean break and it is justified. Furthermore an order which envisages a split of the business is contra indicated save for the limited purposes of providing security for the wife to lead to the payment of further capital. A clean break is achievable, if not immediately, within a reasonable time. In any event it is possible to crystallise H's liability to W now and provide for payment over time.

33. Unusual though it is as I have emphasised, having heard Mr Boydell's explanations and further arguments, I think I understand what lay behind the order transferring the Kerala shares to the Husband. However it remains undesirable except as a mechanism to provide security for the wife. Accordingly I shall not disturb it at this stage but the wife will hold the shares and not dispose of them for a specified period and upon certain terms and conditions.

34. Thus I would delete paragraphs 4 and 6 of the District Judge's order and replace it with an order in the following terms :

"4. The Respondent shall forthwith transfer to the Petitioner all his legal and beneficial interest in the shares in Kerala Ltd ( together with the underlying assets) upon the following terms and conditions :

a. The wife will hold the shares and not dispose of them until 1st January 2009 or the happening of one of the events referred to in paragraph c. and d. below.
b. No rental payment in respect of the occupation of Unit 1 Greatbridge Business Park shall be due to the wife from the husband or from South Coast Bearings Ltd until the happening of one of the events referred to in paragraph d below
c. In the event that the husband pays the wife £180,000 on or before 1st January 2009 the wife will transfer the said shares back to the husband and the periodical payments order set out at paragraph 6 below shall stand discharged.
d. In the event that

i. the husband fails to pay the full amount of £180,000 by the 1st January 2009 or
ii. the husband is declared bankrupt before that date or
iii. the husband defaults on the order for periodical payments set out in paragraph 6 below or
iv. Mr Henderson enforces his charge over Unit 1.

Then the wife's obligation to hold the said shares and /or retransfer them and not to claim rental shall cease and she shall be free to deal with the shares and the underlying assets owned by Kerala Ltd as she shall think fit.

5 As per the District Judge's order

6 (In place of paragraph 6 a and b of the District Judges order) The Husband shall pay periodical payments to the wife at the rate of £18,000 pa (£1500 per month) in advance from 15 May 2007 until the payment of the £180,000 as envisaged by paragraph 4.c. above or the occurrence of one of the events referred to in 4.d whereupon the order shall stand dismissed and her claim shall be discharged.

7 The arrears of periodical payments will be remitted save for £10,000 which shall be paid on or before[ ].

8 Paragraph 10 of the said order be varied so that the Respondent's claims do stand dismissed upon the transfer back of the said Kerala shares in accordance with paragraphs 4( c) or the happening of any of the events in paragraph 4(d)

35 Accordingly, I would allow the appeal from the Circuit Judge and set aside the District Judge's order to the extent envisaged above. Otherwise the District Judge's order will stand. If the appellant or Counsel wish to make any further submissions on the precise form of the order to give effect to this Judgement I would be prepared to consider them, in the first place.

36. Lord Justice Thorpe: I agree.